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PC-06-21-16 Special Meeting CITY OF SHOREWOOD COUNCIL CHAMBERS PLANNING COMMISSION MEETING 5755 COUNTRY CLUB ROAD TUESDAY, JUNE 21, 2016 7:00 P.M. MINUTES CALL TO ORDER Chair Davis called the meeting to order at 7:00 P.M. ROLL CALL Present: Chair Davis; Commissioners Bean, Johnson, Maddy and Riedel; Planning Director Nielsen; Council Liaison Sundberg; and, Finance Director DeJong Absent: None APPROVAL OF AGENDA Bean moved, Maddy seconded, approving the agenda for June 21, 2016, as presented. Motion passed 5/0. APPROVAL OF MINUTES None. SPECIAL MEETING 1. DISCUSSION REGARDING TAX INCREMENT FINANCING (TIF) DISTRICT FOR OPPIDAN’S SHOREWOOD SENIOR HOUSING Director Nielsen turned this item over to Director DeJong who has been working with Administrator Joynes and Springsted Incorporated (the City’s financial consultant). Director DeJong noted he has been working with Administrator Joynes and Springsted Incorporated (the City’s financial consultant) on a Tax Increment Financing (TIF) Plan proposed for Oppidan Investment Company’s proposed Shorewood Senior Living planned unit development (PUD). DeJong provided a high level summary of the TIF Plan. TIF is a financing tool used to help pay for extraordinary costs incurred by development.  Oppidan’s proposed Shorewood Senior Living PUD qualifies for a TIF redevelopment district.  The TIF District for this PUD would be the project site which is a combination of three lots (6020  and 6050 Chaska Road and 23075 State Highway 7). The Tax Increment Project Area will be designated as the entire City.  A TIF District can last up to 25 years. For this project the District will be in place for about 19  years. The intent of TIF is to capture the taxes generated by the increase in the TIF District’s value.  CITY OF SHOREWOOD PLANNING COMMISSION MEETING June 21, 2016 Page 2 of 7 The current value of the three parcels for tax purposes is $985,000 and the value after the project  is complete is projected to be $17,194,320. The current tax collected for all of the jurisdictions on the existing three parcels is $21,955 and the amount after the project is complete is projected to be $214,929. The taxes collected on value of the property before development would continue to go the taxing  jurisdictions during the existence of the District. No jurisdiction would lose tax revenue because of the TIF District. During the time of the existence of the TIF District the City would capture the increase in taxes  and use them to make improvements to support the project as well as public improvements Council deems appropriate. The City can spend up to 25 percent of taxes generated by the project outside of the District but  the remainder must be spent on improvements within the TIF District project area (e.g.; dealing with the exit off of Highway 7 onto Chaska Road). For this project there would be almost $1.9 million in costs related to the site itself and there  would be about $1.3 million in costs to extend Shorewood municipal water from where it stops at Yellowstone Trail and Minnetonka Drive to the project site. In nineteen years the tax revenue received by Shorewood from those three parcels will increase  from $4,383 to approximately $83,315. In nineteen years the tax revenue received by the School District will increase from $3,218 to approximately $63,084. In nineteen years the tax revenue received by Hennepin County will increase from $6,578 to approximately $125,016. That increase in tax revenue could not happen without TIF because it would not be financially feasible for Oppidan to develop the site without it. The City’s portion of the project would be financed internally with an inter fund loan.  The City would issue a TIF Note to the developer that says the City would repay the developer as  the TIF comes in. The actual water costs directly are a little more than $800,000.  The extension of Shorewood watermain is quite costly. Council gave preliminary approval to  finance the extension though cost sharing. Oppidan will contribute $400,000; $300,000 will be used from the Water Fund; and, water hookups should occur along the new line and bring in approximately $300,000. Oppidan originally proposed contributing $200,000 because at that time Excelsior municipal water was going to be extended to the site and that was going to cost about $200,000. TIF project benefits to the City include things like installing a stormwater pipe to replace the  stormwater ditch. Curb and gutter and stormwater along Chaska Road would be put in. The ditch allows power lines to be buried. As a result the landscaping setbacks could be increased and the height limitations for new trees would be eliminated. There will be funding available for some local traffic improvements which are yet to be determined. Watermain would also be extended to the south side of Highway. Commissioner Maddy asked how many additional properties would then have access to City water because of the watermain extension. Director DeJong explained there are 22 properties that are currently hooked up to the Excelsior water system that could move over to the Shorewood water system once it has been extended. Once Shorewood watermain is south of Highway 7 watermain could potentially be extended to other Shorewood properties in the future; for example, to near Galpin Lake Road. Maddy then asked if the watermain would be a dead end on the other side of Highway 7 or would it be looped. DeJong explained it would be a dead end with a lot of water moving through it. The proposal is to have about 105 living units in the facility so there should not be any issue of water being stagnant too long. He noted the pipe would be oversized so it could serve the rest of the area down there. There would be enough capacity to serve fire suppression and future connections. CITY OF SHOREWOOD PLANNING COMMISSION MEETING June 21, 2016 Page 3 of 7 Commissioner Riedel stated with TIF the City would essentially be foregoing the additional tax revenue during the existence of the TIF District. Based on his calculations the City would forego about $3 million in taxes over the 25 year period in exchange for an increase in property value estimated at $18 million. He asked if that is correct. Director DeJong explained the value will go up over time and the TIF calculations have factored in an inflation factor of 1 percent. Hennepin County has told staff that its best guess right now is the taxable value would be about $165,000 per unit. Taxes on those units will not be collected until starting in 2019. There is a lag of about one year from the time the project is complete until the start of collecting full taxes. DeJong noted he would not call it foregoing taxes. He clarified that Oppidan is going to pay the taxes on the new value. The incremental tax that will be generated from the increased value will be used to pay the extraordinary costs associated with the development; costs above and beyond what it would be for a greenfield site. Riedel stated his understanding is that the basic premise of a TIF is that it should be considered if there are extraordinary costs but specifically for blighted land (specific conditions). Although it is not the case here, the use of TIF has been criticized elsewhere as being a mechanism that is overused by municipalities to develop perfectly good farmland. He stated from his perspective because of the cost for extensive soil correction and because of the cost to extend municipal water this is an appropriate use of TIF. Director DeJong noted that in addition to the need for extensive soil correction there are some hazardous materials in some of the buildings on the project site. That causes the TIF to meet the statutory requirements for blight. He clarified that there could be a perfectly serviceable building and still meet the blight conditions under the statutory language. Director DeJong reiterated the City would not be able to have the less than four acres in size site extensively developed without TIF. Commissioner Riedel asked if the premise of TIF is that the financing should only be provided for a project that otherwise could not or would not be done without TIF. There is no other project that could increase the value of the property for tax purposes by the same amount. He stated from his perspective if there were other projects then he does not think TIF would be appropriate. Director DeJong confirmed that and stated it may be possible to develop the site with four houses. Commissioner Bean stated if Oppidan were to move forward with its proposed project he asked what the tax rolls would be without TIF. Would Oppidan not do the project without TIF? Director DeJong noted if Oppidan does not get TIF it would not move forward with its proposed project. Bean asked what would happen to the tax stream if the City did not approve TIF yet Oppidan moved forward with the project anyway. Director DeJong stated there would be an increase in tax revenue for the City. Director DeJong explained there is a statutory requirement called the but-for test. That means that it has to be validated that the proposed project would not be viable for the developer without TIF assistance because the return would be too low or negative. Council needs to come up with that finding. There is a meeting with Springsted to review the but-for test and to verify the returns with and without TIF in the developer’s proforma. Bean asked how the projected value of the development was determined. DeJong explained Hennepin County has a standard value for new senior living projects. That is what was used to determine the value. CITY OF SHOREWOOD PLANNING COMMISSION MEETING June 21, 2016 Page 4 of 7 Bean then asked what assumptions were used to come up with the projected $300,000 in revenues from water hookups. DeJong explained the assumption is the City will get 30 hookups with a $10,000 water connection charge for each hookup over the course of the next 20 years. Bean asked what the expected adoption rate would be. What percentage of the property owners would hookup? DeJong stated because of issues with ground water availability and quality staff expects that at some point there will be a mandate for property owners to hook up to municipal water. Bean noted that he thought that is an optimistic forecast. He stated it took about 20 years to get to 1972 before there was water clarity in Lake Minnetonka of about 18 inches on a good day; that came after sanitary sewer hookup mandate was put in place. Bean asked what the adoption rate has been connecting to City water for the watermain that has been extended over the last 10 years. DeJong stated that over the last five years the only place watermain has been extended was along Star Lane and about half of the property owners have hooked up. That project was completed in 2015. Bean then asked if he should assume that there would have to be 60 properties that would have new access to watermain in order to achieve a 50 percent hookup rate. DeJong stated that is possible. Bean asked DeJong to give him more confidence that additional homework had been done to come up with the $300,000 projection for hookups. DeJong stated staff does not have much experience with that. He noted that people are starting to experience more issues with having arsenic in their well water. He also noted the $300,000 is a ballpark figure. He explained the City Ordinance does have a requirement that if a property owner’s well goes out and if access to City water is available then the property owner is required to hook up to City water. Bean commented that those ordinances got him thrown off the City Council 20 years ago. Bean went on to ask what the backup plan is if the City does not get anywhere near the $300,000. DeJong explained if everything works out the way the proposed financing plan is laid out all of the costs for the watermain extension and the street improvements and costs the other things associated with the proposed project will be covered by the TIF. The City is not relying on the water hookups to fund things. The financing proposal is what was originally presented to Council when staff was trying to estimate the costs. The City’s costs in total are about $1.4 million; that includes the costs for watermain extension and other improvements such as traffic improvements. Of that, Oppidan is contributing $400,000 toward that. If the City finances Oppidan for just under $1.9 million as it requested then the City should be able to cover the $1 million for the watermain extension and other City improvements and pay itself a modest amount of interest. Bean asked if that can be done without funding from the Water Fund or the hookups. DeJong clarified upfront financing needs to come from the Water Fund to cover to $1 million; there is about $3 million in the Water Fund so there would be more than adequate funds to maintain the water system. The Water Fund will be paid back over time as the developer gets paid back. Bean asked if staff is comfortable with the numbers. DeJong noted he is very confident that the TIF can cover the City’s costs. Bean stated 13 years from now the City’s demographics may be different. What would happen if Oppidan’s project is not successful and it abandons the facility? DeJong explained staff has spoken with the City Attorney about having a minimum assessment agreement between the City and Oppidan in place so that the value does not fall below the original projection. It would provide protection for both the City and Oppidan if the project was not successful. That would provide sufficient tax increment over the existence of the TIF District. That assessment is absent any increase from inflation. He stated it is possible that Oppidan could develop the site and lease the facility and then sell the project to an investor; CITY OF SHOREWOOD PLANNING COMMISSION MEETING June 21, 2016 Page 5 of 7 that is what some developers do. Bean noted that Oppidan stated it would not do that during the public hearing on the PUD. Oppidan intends to own and develop the site and hire Ebenezer to run the facility. Bean asked what would happen if Oppidan bails. DeJong stated he would have to rely on the City Attorney’s expertise. Bean then asked what the collateral would be for the assessment agreement. DeJong stated that is a legal question he is not prepared to answer. Bean noted that is a concern for him. The City is going to spend a couple million dollars on infrastructure on the premise that the City is going to get paid back plus some over the next 19 years. Director Nielsen noted the assessment agreement goes with the property. Bean stated if Oppidan bails the project fails; it would no longer be a PUD and the tax value plummets. DeJong stated he does not know why the tax value would plummet. Bean stated the City should enter into this arrangement with a clear understanding of what the risks could be for the City if things went poorly with the project or with Oppidan. He then stated the area could become over saturated with senior housing which the market cannot support resulting in some senior housing development not making it. He commented one plan B could be the City may have to eventually bond for the some of the cost. Director DeJong stated there is additional coverage for this TIF District because it is not going to be in existence for the full 25 years. If something drastic happens 10 – 15 years into the existence of the District then it would just take longer to pay the money back. But, it would not go down to zero. Commissioner Bean concurred and stated it could go back to being residential property where the tax appears to be $0.10 on the dollar when compared to the proposed use based on the current chart versus future taxes. Director Nielsen stated the bank that would end up owning the building would likely demolish the facility and put up twin homes in its place. Bean stated the bank would not hang on to the property; it would get it off its balance sheet. Commissioner Maddy asked what amount of TIF would be dedicated to this project. Director DeJong stated the developer would have an investment of about $1.87 million in the proposed project. The City will issue the developer a note for that to be repaid over the course of 25 years at 5.5 percent interest. Maddy stated it appears to him that it would be a 10-year TIF deal. He asked if people are expecting it to be fully repaid in about 10 – 13 years. DeJong stated there is about $1 million in City costs that also has to be repaid and noted the payback period is about 19 years. Maddy asked if people have estimated the increase in demand on City services because of the higher use over the 19-year period. DeJong stated that would be minimal. There may be some modest increase in calls for public safety services. Senior living places generate a few calls a month. The City is already plowing the roadway and there would not be any additional property to maintain. Director DeJong noted that the resolution included in the meeting packet states “… the proposed Redevelopment Plan and TIF Plan conform to the general plan for the development or redevelopment of the City as a whole and the Planning Commission recommends the Redevelopment Plan and TIF Plan to the City Council of the City of Shorewood for its approval.” Commissioner Bean asked if other taxing authorities like Hennepin County and the Minnetonka School district have to approve the TIF Plan. Director DeJong noted a copy of the draft Redevelopment Plan and the TIF Plan have been sent to the County and School District but they have no decision making authority. Commissioner Maddy asked if the developer has shared with the City how much they paid for the three parcels. He stated he has been aware of developers asking for TIF because they overpaid for properties. He then stated the three properties have poor soils and lack access to municipal water. That should have CITY OF SHOREWOOD PLANNING COMMISSION MEETING June 21, 2016 Page 6 of 7 been factored into the purchase price for the properties. Director DeJong stated he thought the total price for the three parcels was about $1.4 million; it was about 40 percent over the assessed value. He explained the structure over the assessed value is that there should be a 95 percent confidence level that the property is going to sell for more than the assessed value. There is a time lag on the assessed value. What was considered was the assessed value of those parcels in January 2015. That value was based on sales from October 2013 through September 2014. He thought the developer did a good job negotiating the purchase prices; the total was not unreasonable. Maddy concurred. Commissioner Riedel asked Director DeJong to talk about the process of negotiating the TIF. Was the detail about the amount the City would provide an active negotiation with Oppidan? Director DeJong explained WSB & Associates analyzed Oppidan’s proforma to determine what costs would be considered extraordinary and what costs would be considered normal development. There was some back and forth negotiation of that. There was also negotiation about how much Oppidan would contribute towards the cost of extending watermain. He reiterated that Oppidan originally proposed contributing $200,000 because at that time Excelsior municipal water was going to be extended to the site and that was going to cost about $200,000. Excelsior decided not to extend its watermain to the development site because Excelsior staff did not think the Excelsior water system had the capacity to support the Oppidan development and future anticipated development in Excelsior. Oppidan doubled its contribution to $400,000. Director DeJong noted staff recommends the Planning Commission adopt the resolution included in the meeting packet. Davis moved, Maddy seconded, Adopting “A Resolution of the Planning Commission Finding the Establishment of the Redevelopment Plan for Redevelopment District No. 2 and the Tax Increment Financing Plan for Tax Increment Financing (Redevelopment) District No. 2 Conform to the City Plans for Development or Redevelopment of the City as a Whole.” Motion passed 4/1 with Bean Dissenting. Director DeJong explained that there is a special Council meeting and Shorewood Economic Development Authority meeting scheduled for July 14, 2016, to approve the final TIF Plan. Commissioner Bean encouraged staff to have more concrete facts and figures on what makes up each of the numbers. For example, what has been the adoption rate for which property owners hooked up to City water after it was made available to them. Having that would provide Council with a better understanding of what the risk would be before it considers the approval of the TIF Plan. Also, provide insight on the probability of there eventually being a state mandate for property owners to hookup to municipal water. Director DeJong stated that currently there are about 1,700 properties where there is municipal water available and about 1,400 are hooked up. That adoption rate is 82.3 percent. That is probably the long- term adoption rate. Commissioner Maddy stated from his perspective it is about a $1.9 million TIF deal because the rest of it is the City’s pipe and money. It amounts to about a 10-year deal which does not seem as risky. Commissioner Bean stated then it should be stated that the worst case scenario is the City is in for $2 million and it can afford that. The project is an objective the City wants for a number of reasons. Even if the project failed the City would have to have spent some of the money. He asked that be explained to Council. He clarified that he was not saying the project is so risky that it would be unsafe. CITY OF SHOREWOOD PLANNING COMMISSION MEETING June 21, 2016 Page 7 of 7 Commissioner Riedel stated from his perspective the risk of the project’s value going to zero dollars is low. 2. MATTERS FROM THE FLOOR There were no matters from the floor presented this evening. 3. OLD BUSINESS / NEW BUSINESS None. 4. DRAFT NEXT MEETING AGENDA Director Nielsen stated this topic was discussed during the Planning Commission’s June 7, 2016, meeting. Chair Davis asked when the Commission is going to discuss short-term rentals. Director Nielsen noted that will be on the July 19 meeting agenda. Davis stated she gathered all the documents for short-term rentals in the City of Duluth. She tried to pull the permit documents and learned there is a one-year moratorium on short-term rentals in Duluth and that was up June 15. Director Nielsen noted that the agenda for the July 19 meeting is quite full. Commissioner Riedel stated Michael Jordan looked at a house on Ridge Road that he contemplated renting while the Ryder Cup event was going on. Chair Davis asked if that house was listed on an online site. Chair Davis stated there are a minimum number of things people have to do to their homes before they rent them. She suggested putting a list of them on the City’s website. 5. REPORTS • Liaison to Council • SLUC Chair Davis stated Arctic Fever is being nominated for a Sensible Land Use Coalition (SLUC) best place. SLUC has an event category. • Other 6. ADJOURNMENT Davis moved, Maddy seconded, adjourning the Planning Commission Meeting of June 21, 2016, at 7:52 P.M. Motion passed 5/0. RESPECTFULLY SUBMITTED, Christine Freeman, Recorder